KLK - HOLD FV RM23.72

Stock Name: KLK
Company Name: KUALA LUMPUR KEPONG BHD

Research House: JUPITER

Price Call: HOLD

Target Price: 23.72

1Q FY2012 Results 

Within expectations KLK's 1QFY12 results werewithin consensus and our expectations. Revenue of RM2.923b made up of 28% ofour forecast while net profit of RM341.0m was 23% of our full year target.During the quarter under review, revenue rose 21% YoY whilst PBT was up by 18% toRM463.2m. The higher YoY profit was mainly contributed by a 24.5% growth in theplantation division's profit on higher commodity prices, higher FFB productionand improvement from refinery operations that yielded better margins. In addition,a lower FRS 139 fair value loss of RM2.3m, compared to a loss of RM45.1m also contributedto the higher earnings. PBT margin of 15.8% was however lower than 16.2% incorresponding quarter of last year.

The Oleochemical division managed to record a21% growth in revenue to RM1.28b. Nevertheless, the division reported a lowerprofit of RM3.9m (1QFY11: profit of RM23.1m) on increased raw material costs and lower margins due to tough competitionin the export market.  Indonesia hadlowered its export duty structure, which conferred on its oleochemical producersan advantage of 15% lower raw material costs. In our plantation sector update reports, we had foreseen KLK's oleochemical operation would be hurt by theIndonesian government's move in lowering export duties.  We expect the division to continue to sufferfrom high raw material costs as CPO prices trended upwards and as Malaysiandownstream players faced stiff competition from rivals in Indonesia unless theMalaysian government moves to boost the landscape in export markets.  

On a quarterly basis, 1Q revenue was 2.5%lower. Net margin at 11.7% was also lower than 4QFY2011's 15.4%. This is due tolower contribution from both key revenue generators ' the plantation and leochemical divisions.  Plantation profits dipped on softer commodity prices.  Manufacturing division revenues fell by 14.5%on weaker demand. Nevertheless, the first quarter was also a seasonally lowperiod as customers were trying to keep stock levels low at the calendaryearend.

Recommendation

We expect the plantation division to continuewith  its good performance in FY12,riding on high commodity prices. Its oleochemical division's performance hasbeen adversely affected by Indonesia's export duty structure. Nevertheless, asKLK also owns Indonesian plantations, we anticipate its oleochemical plant inIndonesia to benefit from the impact of the differential in export duties. Weare keeping our  HOLD recommendation withour fair value unchanged at RM23.72.  

Source: Jupiter Securities